It has been several years since your office last upgraded its office networking software. Two competing systems have been proposed. Both have an expected useful life of 3 years, at which point it will be time for another upgrade. One proposal is for an expensive, cutting- edge system, which will cost $800,000 and increase firm cash flows by $350,000 a year through increased productivity. The other proposal is for a cheaper, somewhat slower system. This system would cost only $700,000 but would increase cash flows by only $300,000 a year. If the firm’s cost of capital is 7%, calculate the net present value of both proposals and briefly explain which is the better option.
It has been several years since your office last upgraded its office networking software. Two competing systems have been proposed. Both have an expected useful life of 3 years, at which point it will be time for another upgrade. One proposal is for an expensive, cutting- edge system, which will cost $800,000 and increase firm cash flows by $350,000 a year through increased productivity. The other proposal is for a cheaper, somewhat slower system. This system would cost only $700,000 but would increase cash flows by only $300,000 a year. If the firm’s cost of capital is 7%, calculate the net present value of both proposals and briefly explain which is the better option.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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It has been several years since your office last upgraded its office networking software. Two
competing systems have been proposed. Both have an expected useful life of 3 years, at
which point it will be time for another upgrade. One proposal is for an expensive, cutting-
edge system, which will cost $800,000 and increase firm cash flows by $350,000 a year
through increased productivity. The other proposal is for a cheaper, somewhat slower system.
This system would cost only $700,000 but would increase cash flows by only $300,000 a
year. If the firm’s cost of capital is 7%, calculate the
briefly explain which is the better option.
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